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Morningstar to Enter Index Business, Launching 16 Real-Time Stock Indexes in 2002

CHICAGO, Dec 17, 2001 – Morningstar, Inc., a leading global investment information firm, today announced that it is entering the index business and will launch a family of style-based equity indexes in the first half of 2002. In addition to serving as tools for portfolio construction and performance measurement, the Morningstar Indexes will be licensed to institutions for the creation of investment vehicles including mutual funds, exchange-traded funds (ETFs), and derivative securities. The indexes will be based upon an enhanced version of the company's proprietary Style BoxTM methodology.

"Morningstar has been a trusted source for investment research for nearly two decades, and we are excited to extend that expertise into building indexes that will help investors create better portfolios," said Joe Mansueto, Morningstar founder, chairman and CEO. "Our quantitative research team has constructed a family of indexes that will serve as rigorous indicators of style characteristics and will make powerful tools for portfolio construction."

Developed initially for the U.S. and European markets, Morningstar's first index offerings will comprise the following: 

Seven Aggregate Indexes:
One Broad Market Index
Three Capitalization Indexes: Large, Mid and Small
Three Style Indexes: Value, Neutral and Growth

Nine Style Box Component Indexes:
Large Capitalization: Value, Neutral and Growth
Mid Capitalization: Value, Neutral and Growth
Small Capitalization: Value, Neutral and Growth

"Morningstar Indexes will provide a single, consistent framework for portfolio assembly and monitoring. Our indexes are designed as discrete building blocks that eliminate security and investment-style gaps or overlap," said Morningstar Managing Director Don Phillips.

"Traditionally, the way investors have thought about the market has been divorced from the way they assemble portfolios or analyze securities. By linking our fund and stock categories with tools for building portfolios and tracking the market, we hope to make it easier for investors to understand their overall positioning and to make necessary adjustments." 

To create the indexes Morningstar worked with leading institutional investors, advisors, and investment consultants. Based upon those findings, Morningstar incorporated the following best practices into the creation of its indexes:

  • Multi-factor Style Model: The Morningstar style indexes will be based on a new 10-factor version of the Morningstar Style BoxTM methodology, which categorizes a stock by its growth or value orientation and market capitalization. Originally introduced in 1992, the current two-factor Style Box model (price-to-earnings and price-to-book ratios) has become the industry standard for categorizing and tracking managed investment portfolios.                   

    In the new model, growth (as measured by sales growth, projected earnings growth, historical earnings growth, cash flow growth, and book value growth) will be separately determined from value (as measured by price-to-earnings, price-to-book, price-to-sales, price-to-cash flow, and dividend yield). Securities are classified as value or growth based upon the dominant factor. If neither factor predominates, a stock will be categorized as neutral. Morningstar will provide additional details about the enhanced Style Box methodology as it gets closer to implementation in the first half of 2002. 

  • Transparent, Non-subjective Index Rules: Morningstar Indexes will be managed using clear, published, objective rules outlining the procedures and criteria for security selection and exclusion, rebalancing and adjustments for corporate actions. The rules will be published at the time of index inception.                    
  • Free-Float Weighted: In order to accurately represent the investable universe of stocks, Morningstar will assign constituent stock weights in each index based upon the available "free float" of outstanding shares, as opposed to all outstanding shares. This method eliminates closely held shares that are, in practice, not available for public investment.                      
  • Stability Buffers: Stocks will only be reclassified in terms of style or capitalization if they move sufficiently beyond minimum buffer zones. Short-term variation in security style will not result in unnecessary index turnover.

Morningstar's Style Indexes were developed by the company's research team, led by Don Phillips, managing director, and Paul Kaplan, Ph.D., CFA, director of research, in concert with Lillian Goldthwaite, director of business development, and Sanjay Arya, CFA, director of Morningstar Index Services.

Dow Jones Indexes will be the calculation agent for Morningstar Indexes. The indexes will be calculated real time in U.S. dollars, and the daily closing values will be available in euros, British pounds, and yen. Performance data, constituent data, and other descriptive statistics will be made available through major data providers, media outlets, as well as through Morningstar's print and software products, the company's investment Web site, Morningstar.com (www.morningstar.com), and its Web site for financial advisors, MorningstarAdvisor.com (www.morningstaradvisor.com).

About Morningstar
Morningstar, Inc. is a leading provider of investment information and analytical tools. The company provides financial data, research, online advice, consulting services and investment solutions for individuals, financial advisors, institutions, and the media worldwide. Morningstar Investment Services, a registered investment advisor and a wholly owned subsidiary of Morningstar, Inc., offers a discretionary portfolio-management service for financial advisors and intermediaries. Morningstar is a trusted source of investment information and analysis for stocks, mutual funds, exchange-traded funds, closed-end funds, and variable annuities. Morningstar employs 800 people in the United States, Canada, Japan, Europe, Australia, New Zealand, and Asia. The company tracks nearly 100,000 investment products worldwide.

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